Continuing the Momentum—Asia’s Updated Economic Outlook

IMF Blog, July 9, 2010

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Asia’s leadership of the global economic recovery is continuing unabated, with a remarkably fast recovery from the global financial crisis continuing in the first half of 2010.
GDP growth in the first quarter of 2010 was generally stronger than anticipated in the Regional Economic Outlook in April, and high-frequency indicators suggest activity remained brisk in the second quarter of 2010.
Strong performance was observed both in economies that avoided recession in 2009 because of larger domestic demand bases (China, Indonesia, and India) and in more export-oriented economies (Japan, the Newly Industrialized Economies (NIEs), and the rest of the ASEAN).

The two “engines of growth” driving Asia’s recovery in 2009—exports and private domestic demand—have remained robust in 2010.
Exports:
- Boosted by global and domestic inventory cycles and the sustained recovery of final demand in advanced economies.
Private domestic demand:
- Continued strong growth across the region despite some easing in policy stimulus and increased volatility in capital inflows and equity valuations after Euro area financial turmoil.
- Private fixed investment strengthened in many regional economies on the back of higher capacity utilization and still relatively low capital costs.
Outlook for the remainder of 2010 and 2011:
- After very rapid growth in the first half of 2010, growth is expected to settle to a slightly more moderate—and more sustainable—path.
- Gradual withdrawal of policy accommodation by many governments is expected, but at a pace unlikely to hinder private sector demand.
- Production and exports likely to continue growing at a healthy pace as long as the global recovery proceeds as envisaged in the July update of the World Economic Outlook.

Regional aggregates:
- Asia GDP growth now expected to be about 7¾ percent in 2010, about ½ a percentage point above the April outlook, before easing to about 6¾ percent in 2011.
Major economies and subregions:
- China: now forecast to grow by 10½ percent in 2010, before slowing to 9½ percent in 2011 as measures are taken to limit credit growth and maintain financial stability.
- India: growth expected to rise to 8¾ percent in 2010/11 from about 7 percent in 2009/10, driven by robust corporate profits and easy financing conditions fueling investment.
- NIEs: expected to grow on average by 6½ percent in 2010, before moderating to 4¾ percent in 2011.
- ASEAN (rest): expected to grow on average by 6½ percent in 2010, before moderating to 5½ percent in 2011.
- Japan: growth expected to reach 2.4 percent in 2010—mainly due to stronger than expected exports in the first half of 2010—before easing to 1.8 percent in 2011 as fiscal stimulus gradually tapers off.
- Australia: growth expected at about 3 percent in 2010 before accelerating to 3½ percent in 2011.
- New Zealand: growth expected at about 3 percent in 2010 before accelerating to 3¼ percent in 2011.

Downside risks for growth during the remainder of 2010 and 2011 have intensified, particularly for Asian economies more dependent on external demand and external financing.
Source of increased uncertainty:
- Much greater uncertainty about the underlying strength of the global recovery after recent financial turmoil in the Euro area.
Transmission channels of adverse shocks:
- Trade channel: if the European recovery stalls and spills over to global growth, Asia may be affected through both trade and financial channels; many Asian economies (especially the NIEs and ASEAN) are highly dependent on external demand and their export exposure to Europe is at least as large as that to the United States.
- Financial channel: contagion from a Europe-wide credit event could materialize through bank funding and corporate financing, especially in economies more dependent on foreign currency financing.
- Risk aversion: further spikes in global risk aversion could precipitate capital outflows from the region and weaken equity valuations, undermining the positive feedback loop between favorable financial conditions and domestic demand.
Relative resilience:
- Economies with larger domestic demand bases (China, India, Indonesia)—referred to as the “growth leaders”—are relatively less vulnerable to a new external demand shock.

Asia retains policy room to maneuver if contagion occurs:
- Central banks could swiftly redeploy tested instruments to overcome market disruptions (example: reestablishment of the U.S. dollar liquidity swap facility announced by the Bank of Japan in May 2010).
- Planned withdrawal of monetary and fiscal stimulus could be delayed to mitigate adverse spillovers to the real economy.
Implicit recommendation:
- Use targeted, timely policy tools and consider gradualism in policy normalization to support the recovery while maintaining financial stability.

Source: Anoop Singh, July 9, 2010 — Continuing the Momentum—Asia’s Updated Economic Outlook